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What Is a Direct Deposit?

Olivia Willemin

Guide

Byron Mühlberg

Reviewer

Dec 20, 2021

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What Is a Direct Deposit?

In the United States, direct deposit, paired with direct debit, is the closest analogue to what is known in other countries as a simple domestic bank transfer, much like SEPA payments in the Eurozone. It’s a type of electronic funds transfer (or EFT) from one party to another, made through a network known as an automated clearinghouse, or ACH — which is why a direct deposit is also known as an ACH transfer — which allows for transactions between banks to be processed in batches, lowering their cost. Direct deposits allow for payments to be made cheaply without the use of physical, paper checks. Being particularly suited to regular payments, they are typically used by companies to pay their employees or their vendors, by the government to send tax refunds or social security payments, or by individuals to pay their rent or utility bills, but also simply to send money to other people.

How Do Direct Deposits Work?

In order to make a direct deposit, payers need to have the name of the payee, the name of the payee’s bank, the payee’s account number, and the payee bank’s routing number. A direct deposit can be set up as a one-off or as a recurring payment. Direct deposits are then processed through the ACH Network in batches, and debiting and crediting instructions are sent to the payer and the payee’s banks, in order to settle the transaction. The whole process usually takes one to three days, but smaller transactions can be completed on the same day if they’re sent early enough in the workday.

Should Direct Deposits Be Used for International Transfers?

Direct deposits can only be made between two US bank accounts, but remittance services like Wise or XE will allow you to provide the funds for an international transfer via direct deposit. Even though this will result in a fee, it is a more cheaper option than making a wire transfer — which will be your bank's default option in making an international transfer for you. Even better, we recommend that you use Monito's comparison engine to find better, more advantageous options for making your international transfers.

Questions You May Have About Direct Deposits

Do I need to have a US bank account to make or receive a direct deposit? 🗽

Yes, direct deposits can only be made in USD between US bank accounts. However, some multi-currency accounts, such as Wise’s, allow you to use US account details to make and receive transactions in USD, which can be a nifty solution if you’re based abroad.
Is a direct deposit the same as wire transfer? 💲

Though wire transfers and direct deposits are both ways of electronically transferring money between bank accounts, they are different in several ways. Unlike direct deposits, which are batched and processed along with other transactions, wire transfers are directly processed between banks without being batched, using dedicated networks, such as Fedwire in the US. Unlike direct deposits, wire transfers can also be sent internationally, using the SWIFT network. Also unlike direct wire transfers, they are normally one off, and usually cannot be set up as recurring payments.
Are wire transfers better or faster than direct deposits? 💸

From an average customer’s standpoint, wire transfers and direct deposits are functionally very similar, but the former tend to have the edge when it comes to speed. Though wire transfers can also take up to a few days to be processed internationally, they are generally faster than direct deposits when sent domestically, taking up only a few hours, if not a few minutes. Direct deposits can be processed on the same day, but only for transactions up to $100’000. This means that for larger payments where speed of the essence, for example in real estate transactions that need to be settled in a specific timeframe, wire transfers are the only option.
Is a direct deposit cheaper than a wire transfer? 💵

Yes, almost always. Unlike ACH transfers, which tend to be free or cost very little because they’re batched together, wire transfers usually command high fees, both to send and receive them. You can expect to pay around $20-$30 to send a wire transfer domestically, and up to $50-$70 internationally, while the recipient will have to pay a receiving fee ranging from $15 to $30 - though some banks make a point of charging much lower fee, or waive them for some customers.
Are wire transfers the only solution for international transfers? 🌎

Though direct deposits can only be sent between two US accounts, there are a few ways to take advantage of their low cost and simplicity in international transactions. If you are looking to send money abroad from the US, remittance services like Wise or XE will usually allow you to provide the funds via direct deposit, and even if they charge a fee, they tend to be cheaper options than wire transfers, and offer better exchange rates. Don’t forget to use Monito’s comparison engine to see which provider offers the best rate for your transfer!

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